Hear Garth in Victoria. Feb 14 noon, Conf Ctr

A month from tomorrow Jim Flaherty will cave. The finance minister’s 2010 budget will fail to raise the minimum downpayment for buying a house to 10%, after a fierce and successful lobbying effort by the real estate and mortgage business. The man who brought us to the edge of the abyss with his 0/40 insanity will, once again, take the road of political expediency.

F knows there’s a bubble, even as he denies it. So does Finance. So does everyone. Last year alone it raised the price of housing 20 times faster than the inflation rate, at a time when salaries increased by zero. This is crushing the middle class. But it will end.

Not, he thinks, on his watch.

That’s called politics. It’s why the country will continue down a path leading to trouble, as it insures 95% leveraged home loans, turn a blind eye to lax lending standards and keep interest rates at absurd levels. It means the bubble has the potential to grow a little more, which will make the deflate all the more miserable.

But F shrugs. Whazza problem?

Well, you’d think a G7 finance minister would get it, since Canada now stands alone among the industrialized nations when it comes to a government-sponsored asset bubble. The second-last national bubble is just starting to gush, and you can hear the air escaping all the way back to Australia.

The country, too, decided creating an artificial housing boom would be the best defence against global economic meltdown. So Australia spent bigtime, giving homebuyers a gift of $14,000 to purchase a home, allowing 100% financing and keeping interest rates at equally ridiculous levels. The result was predictable – the country has become unaffordable to its own middle class.

Remember that report we booted around last week showing Vancouver as the priciest market in an international survey? Well of the 20 least affordable cities in the world, two are in Canada and a whopping 12 are in Australia. The consequence of bone-headed public policies was a real estate mania and rampant price speculation which even the government recognized could backfire and destroy the economy.

So, the $14,000 homebuyer bribes ended. And interest rates have risen. As an inevitable consequence, the real estate market is falling apart. News came yesterday that rising rates will trigger defaults on Australian mortgages. Last week a survey found 45% of all recent buyers (in the last 18 months) are under severe mortgage stress, with many forced to use credit cards to keep up their home loans.

Why? Simple. As a result of the housing love affair and cheap money Australians have a debt-to-disposable income ratio of 156%. Hell, that’s just like ours (we’re now at 145%). That means it was a cool idea to pile on more mortgage financing and buy a nice sucker of a home with little money down when prices were rising, since equity grew overnight. But when the market froze, all that remained was the debt. Whoops.

So, F would know this stuff. Just as he knew it was an almost identical trap which gutted the American middle class. As home prices raced higher amid low rates and cheesy mortgages, families bought ever-pricier houses knowing a rising market would make it all work out. But when the music stopped, the situation turned extreme.

And just to remind us of what happens when reality returns, it’s still happening.

This week CIBC economists predicted a second price crash in the US as listings jump, tax stimulus ends and rates inevitably increase (all things which we should expect).

How bad is this?

“The risk of a double-dip in U.S. home prices is not simply the result of properties being sold at ‘fire-sale’ valuations, but also due to a deluge of shadow inventory coming onto the market. Although conventional inventories are trending lower, shadow inventories, capturing seriously delinquent and bank-owned properties, are just as large.”

Mr. Tal and Mr. Grauman noted that almost 2 million U.S. mortgages are more than 90 days delinquent, and most will end in a foreclosure. Some 2.3 million properties are already in foreclosure or seized by banks, they said, also warning of a record number of unemployed and the fact that some 10 million households are in a negative home equity position of more than 20 per cent.

This is what happens when governments screw up, distort market forces, trick people or paper over their failures with the creation of false conditions. Real estate has destroyed the US middle class for at least a generation. The bursting bubble in Australia will be the cruelest of jokes on hundreds of thousands of young couples. And it’s coming here.

Only a greater fool wouldn’t see this.

Unless the fool is elected, and cares not.